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Bill-Collector Confidential
Chapter 2, "How Creditors Try to Collect" 

Student Loans

"College is for kids with rich daddies and should never be taken too seriously," insists author George (who drank his way through Colgate in the 1950's). Author Steve, who had full scholarships to college, agrees. (However, Steve's wife, who borrowed her way through college, is on track to be paying her last student-loan installment with her first social security retirement check.)
   In a system that is constantly moving the goalpost forward, that old elitist institution, college, has been sold to the consuming public as a life-necessity. It has become acceptable for innocent, not-so-rich youths to go deeply into debt while striving for the golden diploma, lest they be left behind in some misty socio-economic limbo. Driven by this psychology, the student-loan biz has exploded and is now in a deep crisis of defaults, like other sectors of finance, although this crisis is not getting any press.
   Available are the Federal Guaranteed Student Loan, the National Direct Student Loan, and private commercial plans from banks and finance companies. Loans to the student are federally guaranteed (and therefore creditworthiness is not a consideration). Loans to students' parents (called PLUS Loans) are not federally guaranteed and are based on the parents’ creditworthiness. Some lenders deal only with parents.
   No rights for the lowly student. The Fannie Mae of student lending is Sally Mae, a government-created middleman of the 1970's that turned itself into a private for-profit corporation in the 1990's. Sally Mae then lobbied a receptive Congress into canceling all consumer rights for the lowly student, including the statute of limitations, the right to bankruptcy, and the right to refinance. Sally Mae would like to get into the collection business. Sally Mae bundles its student loans and sells them in financial markets. For this reason, Sally, like her mortgage siblings, is in crisis.
   The average student graduates $20,000 in debt! A burden of over $100,000 is not uncommon for an advanced degree. Thirty percent of student loans go into default. What a way to start out life! This is a very recent phenomenon. The cost of college has ballooned, just like real-estate, and it now costs an average $136,000 for a four-year degree. Prep schools ditto. As with housing, unaffordability drives the lending market. Borrowing has doubled in the last decade. Students have borrowed $85 billion.
    Is it the objective of the system to liberate the individual through education or to lock him into conformity for a lifetime? If you don't have a rich daddy, can the rewards be sufficient to justify the sacrifice? 
   Today's financed college graduate, whatever dreams he may have started out with, begins his professional life as a submissive, indentured servant of the system, obligated to payment for endless years. Whatever narrow professional edge he may have gained, his life-choices and consciousness have become narrowed by his desperation to get clear of debt. He is also likely to have become an intellectual prisoner, for he dare not question any of the collegiate mythologies he's been taught at such huge expense. For example, he will not get any debtsmanship in his economics courses, for the basic understandings are academically taboo. Any professor who would expose the deception of the credit-selling system, especially as it functions on campus, and dare to warn his students against participation, is not likely to progress far in his career.
   It's barely getting into the news, but student lending is just as big a scandal as mortgage and credit-card lending. Student lending has created a national tragedy. The problem is becoming generational. One college debtor may marry another, and the couple may start out jointly owing $350,000. The children of perennially indebted parents go off to college and continue the tradition. Desperate student-loan debtors have been fleeing the country, and some have committed suicide.
   The scale of the student-loan biz rivals that of credit-cards. Student lenders are up to the same unsavory stratagems as credit-card lenders. They are as quick to levy capricious late fees, default interest-rate hikes, and exorbitant penalty fees. Like credit-card lenders, student-lenders try to throw accounts into default so that they can jack up interest rates. With this particular high-risk financial product, that's where the managers think the money is.
   The lofty institution of the university is behaving like a for-profit corporation itself and has made collusive alliances with banks, credit-card companies (and with book publishers as well). In the news are reports of college officials, including venerable university presidents, resigning in disgrace, for it has been revealed that the campus financial advisor is not like a faculty member with the students' interests at heart but works for a bank, is on commission, and gives kick-backs to the college.
   Thirty years ago, some colleges still offered their own in-house student-loan programs, but even then there was a trend to outsource. For the college it's a cash-flow advantage to have all that tuition up-front from a bank rather than in installments over time. Also it was a sensitive situation for a school to be a bill collector to its students.
   The once independent campus has become a marketplace for credit sellers, and school and financial corporations have become inextricably entwined. College textbook publishers are free to scam the students with exorbitantly priced textbooks, compounding the student's debt. A tenured professor (who today may be earning an executive-level six-figure salary) can augment his income with royalties on his overpriced textbook, which he has authored under contract to a publisher and which he requires for his students. Books for one semester can cost $1200. If a student does not have the cash, credit-card salesmen have set up in the bookstore and are right there to help him into more debt. Credit cards flow freely on campus, and 84 percent of students carry them.
   Unlike credit-card and other debtors, the student-loan victim has no right to bankruptcy, has no consumer protections whatsoever, and is singled out for special hassles and oppressions.
     On the day that I rewrite this section, it's in the news that President Obama wants to eliminate Sally Mae. (The same news cycle announces the apparent suicide of the CFO of Freddie Mac.) Obama says Sally Mae has to go so that government can deal with students directly. Sally is fighting back furiously, says the news. Will some reform of default interest hikes and similar rip-offs come out of this crisis?
   Collection procedures for non-government student loans resemble those of other unsecured loans. (See banks and finance companies above.) Student lenders have unique collection challenges. Skip tracing is often necessary, as former students drop out or move around. Collector's often hound a student's parents.
   Because student loans cannot be discharged in bankruptcy and have no statute of limitations, the debtor can get sued forever. The government can intercept tax refunds, can deny security clearances and can deny occupational licenses or suspend them. (Author Steve has a client in Louisiana who was denied a casino employee’s license for a delinquent student loan.) The government can seize social security and disability payments. It can garnish wages without the usual due-process. A delinquency can ride on the debtor's credit report indefinitely, for the Fair Credit Reporting Act sets no time limits for student loans.


Challenge the validity of the debt.
Since your student lender may have been bundled your loan into some financial product and sold into the marketplace, like a mortgage, the original documentation on the loan may be long-lost. If you have paid nothing on the debt, you may be able to deny that it is yours and to challenge the collector to prove otherwise. This is a possibility that should be explored experimentally. Any loan type that has been parsed into pieces may have problems in proving validity in a court of law, but no one should rest assured that this is necessarily the case. The strategy is experimental. The debtsman is an experimenter.
 Thwart an IRS interception. The lender or guarantor of a defaulted student loan will tell the IRS and the state to intercept tax refunds. While this is effective, it's also easily defeated by the astute debtsman. How? Change the withholding on your paycheck so that at end of year you owe some tax. Sally Mae cannot intercept a refund if there isn't any.
   Other relief for the student debtor? It may even be possible to discharge the debt in bankruptcy if you can establish an unusual medical burden. There are loan-rehabilitation programs that collectors encourage in which the debtor signs some papers and his delinquent loan becomes current, but the terms may be onerous.. It may be possible to wiggle out of some of the obligation on your defaulted student loan by pleading that medical problems make it impossible for you to work or to shoulder the payments. If you are a medical professional, like a nurse, there is a special relief program.
   Revolt. Suicide? Expatriation? Don't panic, says debtsmanship. Fight. You would think this particular class of victims would revolt. Are not students the most revolutionary of populations? (Perhaps this is why the system wants them neutralized by debt.) Actually, victims are finally organizing into movements of resistance. One campaign is Reduce the Rate from Jessie Jackson ( As with mortgage loans, the black population has been particularly targeted.
   The College Loan Scam is an expose' by Allen Michael Collins. A student debtor himself, Collins had asked for forbearance on his $38,000 loan, but the loan holder responded by throwing the loan into default, which soon drove the sum up to $100,000. His book is an act of debtsmanship.
   Your best strategy may be to join the existing campaign or to start a student debtsmanship campaign of your own.

Copyright © 2012
by George Trinkaus and Steve

All rights reserved.

from Bill-Collector Confidential

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